Can I buy a new
home and keep my existing home as an investment property?
YES! But, as with
anything, there are restrictions if you are going be getting a mortgage on the
new property.
In the past, a homeowner would provide a fully-executed
lease to the lender showing the amount of the monthly rental income. The lender would then use 75% (typically) of
that rental amount as income to help with qualifying for a new mortgage. The 25% reduction in rental income was to account
for vacancies, repairs, and other expenses of renting a property.
But, with the decline in real estate values over the past
several years, there was a huge increase in a practice called “Buy and Bail.” A home owner would buy a new property at the
now lower sales prices and historically low interest rates, and then bail on
their current residence - letting it go into foreclosure after the closing on their
new home.
In 2008, to combat the practice of “Buy & Bail,” changes
were made to underwriting guidelines. It
became harder to use rental income from a property being vacated.
FHA Mortgages
FHA guidelines state, “Underwriters may not consider any
rental income from a borrower’s principal residence that is being vacated in
favor of another principal residence…” except under the following conditions:
1. Relocation – if the borrower is being
transferred with a new or existing employer, and it is not within a reasonable commuting
distance to the existing property, the borrower may use 75% of the rental
income for qualifying purposes as long as they have a properly executed lease
that will last for at least one year from the closing date on the new property. FHA also recommends evidence that the new
tenant has paid a security deposit and/or the first month’s rent to the
borrower. Even though this is only “recommended”
all underwriters I know will require this evidence.
2. Sufficient Equity in Current Property – if the
borrower has 25% equity in the property (75% Loan-to-Value Ratio), they may use
75% of the rental income for qualifying purposes. The LTV can be determined by a new appraisal
or by comparing the current mortgage balance to the original sales price of the
property.
Conventional Mortgages
Fannie Mae & Freddie Mac have adopted the same changes to their
guidelines in respect to rental income when renting out your current residence and
buying a new property. Fannie
Mae/Freddie Mac will allow a borrower to use 75% of the rental income for
qualifying purposes provided the borrower can document at least 30% equity (70%
LTV) in the property being vacated. This
can be documented by an appraisal, and AVM (automated valuation model), or a
BPO (Broker Price Opinion – an estimated value provided by a licensed real
estate broker) although many lenders will require that an appraisal be used. A properly executed lease AND proof of
receipt of a security deposit from the tenant and deposit into borrowers
account is required.
If the borrower does not have 30% equity in the property being vacated,
they will have to have sufficient income to afford both properties and they will
need sufficient reserves after closing to cover the housing expense (principal
& interest, taxes, insurance, mortgage insurance, homeowners association
dues, etc.) for BOTH the property being vacated and the property being
purchased.
These guidelines only apply to rental income on a property begin vacated
and not properties the borrower may already own as investment properties.
Please let me know if you have any questions about your mortgage or buying
a new home. I can be reached at barkerloans@gmail.com or 708.473.7688.
